Declaring Unaccounted Money Stashed in Demonetized Notes

 

Declaring Unaccounted Money Stashed in Demonetized Notes – Options You Have and Tax Implications

Worried about your unaccounted money stashed in a secret hideout in form of demonetized currency notes? You should be worried! You really didn’t do a good thing holding black money. In case you are reading this article in order to find out how to get rid of your unaccounted money or how to disclose the same without paying penalty or without getting into trouble, you are out of luck. We cannot give you the solutions you seek. However, if you want to live happily without being prosecuted, this article is for you. Here we will tell you the options you have for declaring your unaccounted money and the amount of tax you need to pay.

Declaring Unaccounted Money Stashed in Demonetized Notes

So, let’s start…

There are actually four options available for you if you have unaccounted money stashed in demonetized notes. These four options are explained below but before we go into an explanation, let us take a tabular look at the four options that are available.

The 4 Options for Declaring Unaccounted Money

Options Available What you can do or what will happen
Option 1 You have unaccounted money and you deposit the cash but you are able to explain the source from where the income has come.
Option 2 You have unaccounted money and you accept that and deposit it and then pay the necessary taxes by filing ITR for 2016-2017. Taxes are to be paid by March 31, 2017. You do not opt for declaring unaccounted income under Pradhan Mantri Garib Kalyan Yojana.
You have unaccounted money and you declare the same under Pradhan Mantri Garib Kalyan Yojana. In such a case, you will pay taxes, you will pay surcharge, you will pay penalty and then you will pay 25% of the income for investment in interest-free scheme for 4 years. Government will grant you immunity and will not open past tax assessments.
Option 3 You neither own up the unaccounted income and nor do you go for the Pradhan Mantri Garib Kalyan Yojana. The Tax Authority detects the income and adds it in your IT return. Tax raids do not take place.
Option 4 Tax raids are conducted and unaccounted money is found. You accept that the money belongs to you during the search and you pay tax and penalties and interests. The income gets included into your ITR’
  During raids, unaccounted money is found and you do not accept that the money belongs to you. You face severe consequences (To be discussed later).

There are important points that you need to remember

  • If you default in tax payments (including advance tax payments, if applicable) in all four options mentioned above expect when you are opting for Pradhan Mantri Garib Kalyan Yojana, penalties may be levied on you.
  • In case you are unable to explain the source of your unaccounted income you will always be under prosecution risk. This risk won’t be there if you declare your unaccounted income under Pradhan Mantri Garib Kalyan Yojana.

Now…

Here is an interesting table which shows you the different ways in which you can actually go ahead and declare cash and the merits and demerits of doing so:

  You have cash in INR 500 and INR 1000 denominations. The options you have…
SCENARIO: YOU HAVE CASH THAT YOU HAVE EARNED IN CURRENT YEAR
Simply deposit in banks
Declare your income and explain the source, pay your taxes
In case there is an unusual spike in the income for this current year, you might get into trouble as you have to explain what really happened.
SCENARIO: YOU HAVE CASH IN DEMONETIZED CURRENCY NOTES
Options that are available to you Option 1 Option 2 Option 3 Option 4
Go for bank deposit and simply accept that it is your unaccounted income Go for a bank deposit and instead of accepting it as your unaccounted income, start hoping for best Dump the cash you have forget that you ever had Go for money laundering, pay something to money launderers and get the old cash converted in new currency notes
Things that will happen to you You will have to pay income tax of 50% of the unaccounted income Nothing might happen and the deposit you make will be accepted nicely and you can use it later as white money. The likelihood of this happening is almost nil You can use this method if you think that you cannot escape even with the 50% tax option If you get after successful laundering, you will have to pay 60% as tax of the money that is left after laundering (remember, you have to pay a lot of money to the money launderers) in case you do not admit that you held the black money and you laundered it. In case you accept your crime, you will have to pay 30% tax.
25% of the unaccounted income will be taken from you to be invested in interest-free investment schemes. You will be asked about the income source and if you are unable to tell the source of the income, you will have to pay a tax of 60% and along with that, you will have to pay a surcharge of 25% on the taxed amount. You will have simply have to dump this entire money and it will be lost forever. In any other case, you will have to pay 90% of the money to the government, 30% of which will be tax and 60% will be the penalty
You will get back 25% of the money, which will be white money and you can spend it the way you want to. Assessing officer in your case may levy a penalty of 10% if he finds appropriate. The possibility of that happening is very high. It will just remain as the black money which the government actually wants to get rid of. In case you are dumping it, the economy will be freed of black money, which is good.  
Merits, if any You will get back 50% of your money (eventually). Nothing good will really happen. Hopefully you will escape being noticed but that hope is very slim. No merits at all. No merits at all.
  The money that you get back will be white money and no one will question it when you use it.      
  You really need not go for money laundering and stuff, which are criminal offenses. You stay away from anti-social elements.      
Downside of the option You sit on the radar of Income Tax Department. Once caught, you will get into very serious problems and you may be prosecuted. You just lose all your money. You will get exposed to illegal and anti-social elements and you will be prosecuted once you are caught.

Now that we have looked into various options, their merits and demerits, let us take a look into each of the four options in details with some examples.

4 Options Explained in Details

Unaccounted Cash is Deposited and the Cash Source is Explained

In case you have cash and you have not reported that cash you deposit as your income, you will be asked to explain the source of the cash that you are depositing. You will have to provide a satisfactory explanation, which needs to be acceptable. In case you are depositing less than INR 2.5 lakhs, the authorities may still ask you question. Let us take a couple of examples as possible scenarios.

Example 1: You are a housewife and you do not earn enough which can be taxed. You do not file ITR because your income is not taxable. However, you have, over a few years, saved INR 2.3 lakhs cash in your home and all the money you have saved is in high denomination notes. It is legal money that you have earned in the past. However, you do have a PAN Card. When you deposit this money, will you have to pay tax?

Answer: Of course, you can deposit this cash amount. You can deposit an amount which is less than INR 2.5 lakhs. This amount can be deposited in in savings bank account. You will not be taxed and the deposited amount will not be reported to the income tax office. This is as per rule 114E. Banks will only report to Tax Department if the amount of cash you deposit exceeds 2.5 lakhs between the period 9.11.2016 and 30.12.2016.

Example 2: Assume that you earn a monthly salary of INR 1 lakh. You pay your taxes properly every year. Then, after taxation, you withdraw INR 50,000 every month from your bank account to cover all the necessary expenses which include medical expenses, fees for schooling of your children, household expenses and more. However, on an average you spend just INR 43,000 every month and the remaining amount stays. That amount you keep in your house and is completely legit. The amount that you keep at home is in form of INR 500 and INR 1000 rupee notes (that are now demonetized). You kept on doing this for quite some time and ended up accumulating INR 3 lakhs in cash in your house. Will you be able to deposit this amount in bank? Will there be tax implications? Will you have to prove that the money is completely legit?

Answer: The moment you deposit INR 3 lakhs in your bank account, the bank will be obligated to report the same to the Income Tax Department. The department will then ask how did you get the money. You will have to give a satisfactory answer. If you say the exact reason which led to the accumulation of the cash, the tax officials will most likely say that if you knew that your monthly expenses were less than INR 50,000, why on earth did you actually withdraw INR 50,000. It will become difficult for you to explain the reason as the tax officials will not find the answer to be satisfactory despite the fact that the reasons you are putting forward are actually genuine. Hence, the best thing you can do now is that you should deposit INR 2.5 lakhs into your own account and then deposit the remaining amount into your wife’s savings bank account. This will help you to avoid confrontation from the IT Department.

Unaccounted Cash is Deposited and the Cash Source is Explained

Now what if you go and deposit unaccounted cash and you fail to explain where this money came from? As we said in the first table in our article, there are two options in this case:

  • You have unaccounted money and you accept that and deposit it and then pay the necessary taxes by filing ITR for 2016-2017. Taxes are to be paid by March 31, 2017. You do not opt for declaring unaccounted income under Pradhan Mantri Garib Kalyan Yojana. Income in this case may be from previous year(s).
  • You have unaccounted money and you declare the same under Pradhan Mantri Garib Kalyan Yojana. In such a case, you will pay taxes, you will pay surcharge, you will pay penalty and then you will pay 25% of the income for investment in interest-free scheme for 4 years. Government will grant you immunity and will not open past tax assessments. Income in this case may be from previous year (s).

What happens when you own up the income?

When you own up the income and you do not opt for the scheme, you will have to pay taxes as per the following schedule:

What you need to pay Percentage that you need to pay
Tax 60% of the unaccounted money
Surcharge 25% of the tax deducted
Cess 3% of the total you need to pay as tax and surcharge
Total you need to pay 77.5% of the total unaccounted money.

Please do remember that even though you are paying taxes, it does not mean that the income tax officials will simply forget about you. They may, if they feel necessary, open up your previous years’ assessments and run a thorough check and if they find anything that doesn’t seem right, you will face serious problems and the option of prosecution cannot be ignored.

What happens when you opt for Garib Kalyan Yojana?

When you opt for the scheme, you will have to follow a different taxation schedule. The good thing here is that the total you need to pay here will be less that the total you need to pay if you don’t opt for the scheme but decide to pay taxes by owning up your unaccounted money. Also, once you go for this scheme, you will get immunity and the tax officials will not check your past taxation records. For this option, you will have to go for the following taxation schedule:

What you need to pay Percentage that you need to pay
Tax 30% of the unaccounted money that you declare.
Penalty 10% of the unaccounted money that you declare.
Pradhan Mantri Garib Kalyan Cess 33% of the tax you pay on your unaccounted money.
Total you need to pay 49.9% of the total unaccounted money.

However, that’s not the end. You will have to give 25% of the total unaccounted money to government. This money will then be invested in interest-free schemes for a period of 4 years. After 4 years, you will be able to claim back your money. So essentially, in the first 4 years from the date of choosing the scheme, you will get back only 25% of the unaccounted money and then after 4 years, you will be in possession of 50% of your total unaccounted money. This 50% will then be total white money and you can spend it in any form you want.

Unaccounted Income is Detected Without Search by Income Tax Authority

If the income tax authority, without conducting a search, detects unaccounted cash stashed or stored somewhere in demonetized currency notes and you do not own up that income and neither do you opt to declare the income under the scheme named Pradhan Mantri Garib Kalyan Yojana, there will be severe consequences. The tax implications under such a situation are shown in the table below:

What you need to pay Percentage that you need to pay
Tax 60% of the unaccounted money that has been detected.
Surcharge 25% of the amount of tax you need to pay, which comes to 15% of the unaccounted money detected.
Cess 3% of the total of tax and surcharge that you pay, which comes to 2.25% of the unaccounted money detected.
Total you need to pay 77.25% of the total unaccounted money.
Additional penalty that may be levied 10% of the total unaccounted money that is detected.
Total you need to pay post penalty 87.25% of the total unaccounted money detected.

Unaccounted Income is Detected During Search by Income Tax Authorities (After Amendment to Income Tax Act)

Here there are two possible scenarios:

  1. During the search, unaccounted money is detected and you own up the income, state how the money was earned, pay relevant taxes and (all interests, if any) and finally include the income in your Income Tax Return or ITR.
  2. During the search, unaccounted money is detected and you do not own up the income. Tax implications in this case will change and the total tax implication will increase drastically.

Let us see each scenario in a tabular format:

SCENARIO 1
What you need to pay Percentage of that you need to pay
Tax 60% of the unaccounted money found during search.
Surcharge 25% of the tax amount, which stands at 15% of the unaccounted money found during search.
Cess 3% of total tax and surcharge you need to pay, which stands at 2.25% of the unaccounted money found during search.
Total amount you need to pay 77.25%
Additional penalty that may be levied 30% of the unaccounted money that is found during search.
Total amount you need to pay post penalty 107.25% of the unaccounted money that is found during search.

 

SCENARIO 2
What you need to pay Percentage of that you need to pay
Tax 60% of the unaccounted money found during search.
Surcharge 25% of the tax amount, which stands at 15% of the unaccounted money found during search.
Cess 3% of total tax and surcharge you need to pay, which stands at 2.25% of the unaccounted money found during search.
Total amount you need to pay 77.25%
Additional penalty that may be levied 60% of the unaccounted money that is found during search.
Total amount you need to pay post penalty 137.25% of the unaccounted money that is found during search.

NOTE: Please note that once you declare your income under the Pradhan Mantri Garib Kalyan Yojana, government will grant immunity from any other law except for a few exceptions. However, no immunity will be offered under any other option or scheme. Government may decide to open up the tax assessment records of the previous year and look into past history to determine what should be done next with people who have a record of stashing black money.

Conclusion:

Pradhan Mantri Garib Kalyan Yojana is the best option you have at disposal. You need to pay only 50% of the unaccounted money and you also get immunity. Why risk your reputation? Return the money that rightfully belongs to this country and work towards the development and betterment of this nation. If you don’t understand the concept of collective progress and instead focus on selfish interest by hoarding lakhs and crores of unaccounted money, you are going to get into trouble. At that point no one will stand by you or work in your favor for the fear of being prosecuted. Black money is a plague for this nation and if we are to truly become a powerful and development nation, we need to get rid of this disease, which apparently seems to be have become India’s genetic flaw. Work together with the government for a black money-free India and we will see a bright tomorrow.

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